A contractor wants to improve cash flow by reducing the collection period for accounts receivable from 45 days to 30 days. With monthly sales of $150,000, approximately how much additional cash will this generate?
Correct Answer
D) $75,000
Reducing collection period by 15 days (45-30) with monthly sales of $150,000 means: ($150,000 ÷ 30 days) × 15 days = $75,000 in additional cash flow from faster collections.
Why This Is the Correct Answer
The correct answer is A because reducing the collection period by 15 days (from 45 to 30 days) means the contractor will collect money 15 days earlier. With monthly sales of $150,000, the daily sales average is $5,000 ($150,000 ÷ 30 days). Multiplying the daily sales by the 15-day reduction gives $75,000 in additional cash flow. This represents the amount of money that will be collected sooner, improving the company's working capital position.
Why the Other Options Are Wrong
Option A: $225,000
This represents one month's total sales ($150,000) rather than the incremental cash flow improvement. The question asks for additional cash generated by the collection period reduction, not the total monthly sales volume.
Option B: $150,000
This would represent 1.5 months of sales ($150,000 × 1.5), which has no relationship to the 15-day collection period improvement. This answer likely comes from incorrectly adding current and improved collection periods.
Memory Technique
Think 'DxD=Cash' - Daily sales × Days reduced = additional Cash flow
Reference Hint
Business and Finance for Contractors - Chapter on Cash Flow Management and Accounts Receivable
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